Week Ending January 26

Middle East Tensions and Algorithmic Trading Fuel Oil's Highest Finish Since November

March ’24 WTI gained $4.60, or 6.2%, this week to finish at $78.01/Bbl. Oil prices broke out of their recent range this week, with WTI posting its biggest weekly gain since October. The crude market found support on the back of rising Middle East tensions, algorithmic trading, and drone attacks on Russian refineries.

The Houthis continued targeting ships in the Red Sea and Gulf of Aden, firing several missiles toward tankers, merchant ships, and a U.S. warship earlier today. This comes as the U.S. military targeted facilities in Iraq and Yemen to contain the Israel-Hamas conflict.

The US and UK imposed sanctions Thursday on four Houthi officials, while China asked Iran to rein in Houthi attacks on shipping. However, undeterred by these actions, the Houthis vowed to continue their campaign.

Despite escalating tensions, the attacks on vessels have resulted in a record surge in insurance costs and delayed deliveries but not a supply disruption. AEGIS previously noted that the conflict since October added geopolitical risk but not the premium on oil prices. However, recent attacks have shifted the market dynamics, now prompting the inclusion of this premium.

Additionally, trend-following algorithms further exacerbated oil’s rally, as reported by Bloomberg. Trend followers, after a significant market shift on Thursday, have moved from being net short to holding net long positions in Brent (45%) and WTI (30%), as per data from Bridgeton Research Group. However, sustaining these higher prices could require additional support beyond algorithmic trend-following buying.

Furthermore, last week's adverse weather and a fourth Ukrainian drone strike on Russian Baltic Sea oil terminals resulted in Russian crude exports falling to a two-month low of 3.36 MMBbl/d in the four weeks ending Jan 21. Port maintenance and more poor weather are expected to weigh on exports this week as well.

The IEA projects the oil market to tip into surplus beginning next quarter, lasting throughout the year unless OPEC+ extends its latest production cuts. Consequently, Saudi Arabia reaffirmed that the said cuts could "absolutely" be prolonged, with a decision likely in the coming months.

AEGIS continues to expect, at the very least, a balanced market in 2024, with the potential for a bullish outlook, especially if Saudi Arabia and Russia extend their unilateral cuts through the end of the year.

Biden Administration Pauses LNG Export Approvals; Freeport Suffers Outage

The February Henry Hub contract posted a weekly gain of 21c after last week’s 80c decline, while prices further out the curve fell on news that some LNG projects may be at risk of a delay. News that Freeport LNG will be operating at reduced capacity led to some selling pressure on Friday, which was quickly reversed as the February contract finished the day up about 14c, although the March contract was unchanged from the prior day.

On Thursday, it was announced the Biden Administration will be halting the approval of new LNG export facilities, pending a review by the Department of Energy to weigh the economic benefits and climate risks associated with the facilities. The announcement likely contributed to the 13.2c decline in Cal ’27 prices from Thursday to Friday. While the news sounds particularly bearish, most of the facilities slated to enter service over the next few years already have DOE approval and will not be affected by the pause. It is primarily facilities planned to enter service after 2026 that may be impacted.

This was not the only notable LNG news this week, as on Friday, Freeport announced that they would be operating at a reduced rate for a month. One of the three liquefaction trains suffered an operational incident resulting from the recent freeze, which the company says should take one month to repair. The facility has been operating at a lower capacity over the past week, but Freeport had not publicly commented until Friday. If the maintenance does take one month, that should lead to about 21 Bcf of gas entering storage rather than being exported.

AEGIS sees Bal ’24 at $2.54 as somewhat fairly priced, but weak weather-driven demand could lead to additional downside while holding a neutral view on Cal ’25 and a bullish view on Cal ’26. We view swaps as more attractive for the summer months and costless collars as more attractive for the winter months.